Environmental Economics

I try to assign a number to Krugman's estimate of the value of not commuting and come up short

Krugman (Working From Home and Realizing What Matters):

First things first: The reduction in commuting time is a seriously big deal. Before the pandemic, the average American adult spent about 0.28 hours per day, or more than 100 hours a year, on work-related travel. (Since not all adults are employed, the number for workers was considerably higher.) By 2021, that number had fallen by about a quarter.

Putting a dollar value on the benefits from reduced commuting is tricky. You can’t simply multiply the time saved by average wages, because people probably don’t view time spent on the road (yes, most people drive to work) as fully lost. On the other hand, there are many other expenses, from fuel to wear and tear to psychological strain, associated with commuting. On the third hand, the option of remote or hybrid work tends to be available mainly to highly educated workers with above-average wages and hence a high value associated with their time.

But it’s not hard to make the case that the overall benefits from not commuting every day are equivalent to a gain in national income of at least one and maybe several percentage points.

If median household income is $70,000 and 1 earner in each household works full-time then the household wage is $35. If time is valued at 1/3 of the wage (the number typically used in travel cost demanad models) then the average household enjoys $1200 in additional time at home (100 hours at $12). If there are 125 million households in the U.S. then the number aggregates to $150 billion.

That is lower, 0.65%, Krugman's 1-3% of US GDP ($23 trillion) estimate. There is some slippage between households and individual adults here, but you get the idea. Krugman is making assumptions less conservative than mine. 

 

David Leonhardt reviews the successes and failures of President Biden's economic team as it transitions

David Leonhardt reviews the successes (low unemployment) and failures (inflation) of President Biden's economic team as it transitions in the NYT's what I think used to be called the the Morning Brief but now it is The Morning. After mentioning infrastructure investment we get this:

Close readers may have noticed that the above list of investments left off one category: clean energy. I think it is important enough to highlight. Given the extreme costs and dangers of climate change, Biden’s investments to accelerate the transition away from greenhouse gases may end up being the most important part of his economic legacy.

The link takes you to July when Senators Schumer and Manchin made a deal: 

The package will include tax credits to speed up the development of wind, solar, hydrogen and nuclear power; a tax credit to reduce the price of new electric vehicles; and money to address the disproportionate burden of pollution on low-income communities and communities of color.

I had totally missed the last part on environmental justice. Can anyone point me to what they did there?

Lael Brainard on climate change

From Reuters* (Biden to name Fed's Lael Brainard as top economic adviser): 

U.S. President Joe Biden is expected to name Federal Reserve Vice Chair Lael Brainard to the White House's top economic policy position as early as Tuesday, a source familiar with the matter said on Monday. ...

Markets' response was muted in Asia hours, with bonds and the dollar steady along with U.S. futures, and analysts said the implications of the appointment weren't very clear.

"We don't know what to infer from this," said Vishnu Varathan, head of economics at Mizuho Bank in Singapore.

"Under normal circumstances I would have thought that her advice to Biden would be very pro stimulus," he said.

First, ignoring the fact that that last quote might be flippant or taken out of context, under normal circumstances an economy doesn't need stimulus, right? An economy might need stimulus during a recession, but that is an abnormal situation. 

Second, my first question was -- what about climate change? So I Googled. Here she is discussing climate change in an speech at the October 2021 Federal Reserve Stress Testing Research Conference titled "Building Climate Scenario Analysis on the Foundations of Economic Research": 

Economic analysis suggests that climate change could have profound consequences for the level, trend growth, and variability of economic activity over time and across regions and sectors. Some of these effects could occur gradually, while others could occur relatively quickly in the presence of "tipping points." Policy, technology, and behavioral responses could similarly have material financial consequences. Against this backdrop, the Federal Reserve is carefully considering the potential implications of climate-related risks for financial institutions and the financial system, with scenario analysis emerging as a potential key analytical tool for that purpose.

Climate change is projected to have profound effects on the economy and the financial system, and it is already inflicting damage. The Sixth Assessment Report by the Intergovernmental Panel on Climate Change (IPCC) notes that "if global warming increases, some compound extreme events with low likelihood in [the] past and current climate will become more frequent, and there will be a higher likelihood that events with increased intensities, durations and/or spatial extents unprecedented in the observational record will occur."

We can already see the growing costs associated with the increasing frequency and severity of climate-related events. The total cost of U.S. weather and climate disasters over the last 5 full years exceeds $630 billion, which is a record. During this period, massive flooding in the Midwest has caused billions of dollars in damages to farms, homes, and businesses. The California Department of Insurance has documented growing problems with the availability of fire insurance for homeowners, and the state legislature provided new protections for wildfire survivors. Last year was the sixth consecutive year that the United States experienced ten or more billion-dollar weather and climate disasters.6 And this summer, Hurricane Ida alone is estimated to have caused more than $30 billion in insurance losses.

The pandemic is a stark reminder that extreme events can materialize with little warning and trigger severe financial losses and market disruptions, and the IPCC Sixth Assessment Report is a reminder of the high uncertainty and potential costs associated with climate-related risks. It will be important to systematically assess the resilience of large financial institutions and the broader financial system to climate-related risk scenarios. ...

So, no surprise, the National Economic Council will be led by someone who takes climate change seriously. But still, good to know.

*The WSJ article is better but it might cost money. 

The dog ate my code and glass houses

Retraction Watch: Influential paper linking recessions and left-wing voting patterns retracted)

A highly cited economics paper that suggested people raised during recessions were more likely to vote for left-leaning political parties has been retracted, apparently due to a coding error that rendered the results invalid.

The retraction marks a rarity among economics papers, which research has shown are infrequently retracted compared to papers on other subjects. The article appears to be the first in The Review of Economic Studies to have been retracted for a reason other than publisher error.

The study’s authors, Paola Giuliano and Antonio Spilimbergo, are economists at the Anderson School of Management at the University of California, Los Angeles and the International Monetary Fund, respectively. Giuliano is also the Chauncey J. Medberry Chair in Management at UCLA.

The paper, “Growing up in a Recession,” was published in November 2013. It has been cited 222 times, according to Clarivate’s Web of Science. Working papers from the World Bank and the Organisation for Economic Co-operation and Development have also cited the article.

The paper was retracted on January 11. ... 

Neither the paper’s authors nor the editors of the journal responded to a request for comment from Retraction Watch.

Here is how it went down on twitter:

I don't really understand the reason: "While the original codes and data sets are no longer available, new analysis with a markedly similar data set does not support the original results." Did their dogs eat the code?

— Tim Martens / @[email protected] witter.net (@econ_martens) January 11, 2023

The thread goes on about how this often happens but back in those days not everyone kept everything. So I wondered, could I replicate old papers? I went to check some results from 2013 articles but there wasn't anything empirical published. I went back to 2012 and yes, here is everything for Johnson et al. (2012): 

While my co-authors finished the models in the other two empirical papers from 2012, I have the data and SAS files so could recreate the analysis if I had too. For example, if someone thought those articles should be retracted. So, I "liked" the dog ate my code tweet. 

NABE's December 2018 macro outlook survey is out

Here are the summary quotes:

“NABE Outlook panelists continue to view the economy as having solid momentum entering 2019, but they foresee GDP growth cooling from 2.9% this year to 2.7% in 2019,” said NABE President Kevin Swift, CBE, chief economist, American Chemistry Council. “The panel expects the Federal Reserve to continue gradually tightening monetary policy, and anticipates a federal funds rate hike at the upcoming December FOMC meeting, followed by three rate increases in 2019.” “While panelists remain generally optimistic, three-quarters of respondents see risks being tilted to the downside,” added Survey Chair Gregory Daco, chief U.S. economist, Oxford Economics. “Panelists view increasing trade tensions as the primary downside risk to their outlook, with 80% of respondents reducing their 2019 GDP growth outlook in response to trade policy developments. Even so, recession risks are still perceived to be low in the near term, with the panel expecting a 20% risk of recession by the second half of 2019, and a 30% chance by the end of 2020.” 

Here is one of the key results:

Almost two-thirds of panelists indicate they have lowered their forecasts for business investment in 2019 as a result of U.S. trade policy, while two-thirds have raised their inflation forecasts moderately. Forty-one percent of panelists indicate that they have lowered their forecasts for personal consumption expenditures, while a small majority reports that trade issues have had no impact on their forecasts for personal consumer expenditures.

Link: https://www.nabe.com/NABE/Surveys/Outlook_Surveys/December_2018_Outlook_Survey_Summary.aspx

How are the economy (and environment) doing--without reference to politics?

Since most of the major news outlets (CNN, MSNBC, FOX, Drudge (?),...) spend all of their time having partisan shouting matches, I thought I would update everyone on some ongoing economic and environmental trends, without mentioning or crediting or discrediting the contribution to those trends by any particular President past or present.  I will leave the attribution of credit or blame to those who choose to participate in such attribution exercises.

All data sets are pulled from the Trading Economics website.  Trend lines are added to some of the graphs for your reference.  

Feel free to use this information in your barroom discussions.

December 2007: “There’s no recession coming. The pessimistas were wrong. It’s not going to happen. ...The Bush boom is alive and well. It’s finishing up its sixth consecutive year with more to come. Yes, it’s still the greatest story never told.

The WaPo:

President Trump's top economist blasted the Congressional Budget Office on Tuesday, dismissing the scorekeeper's recent projections that the Republican tax law would push the nation's annual deficit over $1 trillion.

“Never believe the CBO. Very important: Never believe them,” Larry Kudlow, director of Trump's National Economic Council, said during an interview on “Fox & Friends.” “They're always wrong, especially with regard to tax cuts, which they never score properly.”

Trump reportedly watches “Fox & Friends” regularly and often reacts to the programming either on Twitter or with proposals for action.

Kudlow's remarks reflect a widespread belief in the Republican Party that the CBO has failed to adequately account for higher economic growth when estimating the tax law's effect on the deficit. The CBO said the tax law will cut government revenue by $1.8 trillion over the next 10 years, or by $1.3 trillion when factoring in potentially higher growth spurred by the law.

Kudlow, a longtime television commentator who was tapped last month to lead the economic council, said CBO's estimates of growth under the law should be much higher. He argued that the tax law will create far greater economic growth than most nonpartisan forecasters estimate.

Dude, chill, it's an empirical question. The tax law has been passed, I don't notice anything in my paycheck and we can find out just how much bigger the deficit is going to be when the time comes. 

My guess is that Larry Kudlow's distrust of the CBO won't have much effect on the mid-term election anyways. But wait, isn't Kudlow the guy who always gets it wrong? (that's his quote in the title)

5 out of 7 continents isn't bad, right?

We're working on PhD recruitment this week (if you applied to OSU AEDE and were accepted, join us, we're FUN!).  I put together a Google map with our PhD placements since 2007.  A bit scary that I might be influencing thinking for this many people and this wide an area.   

 

When it comes to easily measured economic outcomes, President Trump 'has had a reasonably good year...but...'

FiveThirtyEight's assessment of President Trump's first year:

The upshot? Few dramatic changes in either direction. Jobs in the manufacturing and coal mining industries ticked up, the trade deficit shrank a bit, and the number of murders in some big cities decreased. The uninsurance rate got worse — the only change in the opposite direction of Trump’s goal. The biggest movement in the direction Trump hoped to see was the increase in oil and natural gas production.

So, according to these measures, Trump has had a reasonably good year. Of course, that doesn’t mean Trump was personally responsible for all of this change — in fact, many of these trends began long before Trump was elected. But presidents often get credited with whatever happens while they’re in office anyway.

[emphasis added, because that's the important part]

EnvEcon 101: Understanding Marginal Tax Rates (and other unnecessarily complicated stuff)

If you haven't heard, the U.S. Congress is likely to pass a new income tax bill this week.  CNN.com has a graphic with the existing and new income brackets and associated tax rates.  This seems like a good time to talk a little about the difference between the marginal tax rates, total tax bills, and the average tax rate paid, as I have found that principles students (and other adults) often find this confusing.     

First a few definitions:

The marginal tax rate is the tax rate that you pay on the last dollar you earn.  For example, if your taxable income is such that you fall into the 33% tax bracket, that means you will pay 33% of the last dollar you earn to the federal government.  An important note is that this does NOT mean that you pay 33% of all of your income to the federal government.  Just 33% of the last dollar you earn.

Your total tax bill is calculated by adding up the marginal tax you pay on each dollar of taxable income you earn, up to the last dollar you earn.

Your average tax rate is found by dividing your total tax bill by your taxable income.

I know I just made things more confusing.  So let's look at a simple example, and then we will look at the actual tax rates that exist currently and the proposed new tax rates to illustrate the concepts.

A simple example:  Let's suppose there are only two defined income brackets.  The lowest income bracket goes from $0 to $50,000 of taxable income.  This income bracket is taxed at a marginal rate of 10%.  The second income bracket is anything greater than $50,001 of taxable income.  This income bracket is taxed at marginal rate of 25%. 

The correct way to to interpret these brackets is as follows:  No matter how much taxable income you earn, each dollar of taxable income you make, up to $50,000, is taxed at a rate of 10%.  So if you make $25,000 a year in taxable income, each of your dollars is taxed at a marginal tax rate of 10%, meaning your total tax bill will be $25,000 * 0.10 = $2,500. 

If you earn $35,000 of taxable income, then you still fall in the 10% marginal tax bracket, and your total tax bill will $35,000 * 0.10 = $3,500.

If you earn $50,000 of taxable income, then you still fall in the 10% marginal tax bracket, and your total tax bill will $50,000 * 0.10 = $5,000.

But hear's where things get interesting (and probably more confusing).  Suppose you earn $50,001 of taxable income.  You now fall in the 25% marginal tax bracket.  Many people interpret this to mean that your tax bill will now be $50,001 * 0.25 = $12,500.25.  But this would be WRONG.

The correct way to calculate your new tax bill is to recognize that you pay a rate of 10% for each dollar you earn up to $50,000 of taxable income, and then you pay 25% for each dollar you earn above $50,000 of taxable income.  So if your income is $50,001 of taxable income, then you will pay 10% in taxes for each dollar up to $50,000 ($50,000 * 0.10 = $5,000) plus 25% for the $1 you earned over $50,000 ($1 * 0.25 = $0.25).  So your total tax bill is now $5,000 + $0.25 = $5,000.25.  

To calculate your average tax rate, you now divide your total tax bill ($5,000.25) by your taxable income ($50,001) and convert to a percentage (100 * $5,000.25/$50,001) to get an average tax rate of 10.0003%.  Notice that the average tax rate is below the marginal tax rate (25%).  This will always be the case.

Let's extend the example.  Suppose your salary is $125,000 of taxable income per year.  Everyone pays 10% on the first $50,000 of taxable income earned, so you pay $5,000 on the first 50,000 of taxable income. On the remaining $75,000 of taxable income (the $75,000 above $50,000), you will pay a marginal tax rate of 25% ($75,000 * 0.25 = $18,750), so your total tax bill is $5,000 + $18,750 = $23,750, and your average tax rate is 100 * $23,750/$125,000 = 19% (notice it is still below the marginal rate of 25%.

So that's the end of the simple example (SIMPLE?!, IKR).  So what does the new tax bill do to income brackets and marginal tax rates?

Here are the current and new income bracket and marginal tax rates under the proposed bill for unmarried individual filers (that's right, to make things even more complicated, tax rates change depending on your filing status--individual, married, or married filing individually, but that's for a later post): 

Let's take a look at someone making $50,000 of taxable income per year.  Under the current tax plan, this person will pay:

• 10% of the first $9,525 of taxable income earned: $952.50
• 15% of each $1 earned between $9,525 and $38,700 of taxable income (($38,700-$9,525)*0.15) = $4,376.25
• 25% of each $1 earned between $38,700 and $50,000 of taxable income (($50,000-$38,700)*0.25) = $2,825

Adding these together, the current total tax bill for someone making $50,000 of taxable income per year is $8,153.75, and the average tax rate is (100 * $8,153.75/$50,000) = 16.31%

The new tax bill drops the marginal tax rates in the second and third income brackets to 12% and 22% respectively, so the total tax bill for someone making $50,000 of taxable income per year falls to $6,939.50 and the average tax rate falls to 13.88%.

It looks like the new tax plan offers a tax cut to someone making $50,000 of taxable income per year.

And that's true...IF WE ONLY BASED TAXES ON INCOME AND DIDN'T FILL THE REST OF THE TAX BILL WITH DEDUCTIONS, LOOPHOLES, GIFTS, POLITICAL PAYOFFS AND RIDICULOUS CRAP THAT KEEPS ACCOUNTANTS EMPLOYED* AND POLITICIANS HAPPY. 

I'VE BEEN CAREFUL THROUGHOUT THIS POST TO MAKE SURE I QUALIFY INCOME AS TAXABLE INCOME.  WHAT THIS POST FAILS TO EXPLAIN, BECAUSE NO ONE CAN REALLY EXPLAIN IT BECAUSE NO ONE HAS ACTUALLY READ THE TAX BILL, IS THAT TAXABLE INCOME WILL CHANGE DUE TO CHANGES IN DEDUCTIONS, LOOPHOLES, GIFTS, POLITICAL PAYOFFS AND RIDICULOUS CRAP THAT KEEPS ACCOUNTANTS EMPLOYED* AND POLITICIANS HAPPY. 

OK, that's out of my system.  As you can see from the tax table above, comparisons between current and new tax bills get more complicated as incomes increase, because not only do marginal tax rates change, but the income brackets change too.  For example, someone who makes $175,000 per year currently falls in the fourth income bracket, but under the new bill falls in the fifth bracket.  I won't bore you with all of the calculations, but,

• Under the current system, someone making $175,000 in taxable income pays a marginal tax rate of 28%, has a tax bill of $41,842.75 and an average tax rate of $23.91%
• Under the new system, someone making $175,000 in taxable income pays a marginal tax rate of 32%, has a tax bill of $37,689.50 and an average tax rate of $21.54%

*In full disclosure, my spouse is gainfully employed by a tax accountant and makes her living by helping people take advantage of DEDUCTIONS, LOOPHOLES, GIFTS, POLITICAL PAYOFFS AND RIDICULOUS CRAP THAT KEEPS ACCOUNTANTS EMPLOYED AND POLITICIANS HAPPY.